How To Develop Recruiter Comp PlansAug 17, 2022
As a coach and advisor to owners and leaders of recruiting firms, I often see two common but separate challenges related to compensation plans:
- The appropriate comp plan for new recruiter hires
- Changing the comp plan when market conditions shift
The area of recruiter compensation has many complexities to consider. Many owners and leaders are unsure how to identify the different elements and assign monetary values to them. As a result, they end up "winging it" and offer new hires comp plans that "seem okay" or that they think they'll accept. The risks you face with these approaches are:
- You increase the odds of people you want to hire rejecting your offers.
- You have unprofitable employees, which may even cause you to lose money.
- Strong performers leave because they discover that they are underpaid relative to their production.
The most successful recruiting firm owners and leaders use a well-designed process to create and modify their recruiters' compensation plans. This is a critical recruitment industry best practice that's too important to shortcut!
The appropriate comp plan for new recruiter hires:
The issues involved in how much to pay people are the same ones you deal with when placing people at clients. Let's review them here:
- Their market compensation
- Their current compensation
- Their level of interest in your opportunity
- The breakdown of base and incentive comp you're offering.
The critical thing to consider is that the greater your base (guaranteed comp), the greater your risk. People who receive a higher base need to produce quicker since they can incur a large deficit early on and have a higher breakeven point financially. For this reason, the most successful firms tend to hire new recruiters who are earlier in their careers and have lower compensation requirements. They also tend to shy away from experienced recruiters since these folks usually command a substantial comp premium and have a higher rate of failure too!
The ideal scenario is to hire people who are highly interested in your opportunity and are willing and able to trade a lower base for a higher commission structure. This way, they share the risk with you…they have more "skin in the game." In reality, if you really want to hire a person and they won't accept a low base, you need to come up with a comp solution that is acceptable to both parties.
Steps to take when designing your comp plan:
Step 1: Use a spreadsheet to get an accurate, objective view of the numbers. You do not know the actual cost of a new hire until you consider all the details. People are frequently amazed when they calculate the fully loaded cost of each recruiter. Below is a list of items you need to account for in the spreadsheet:
- Base comp
- Payroll taxes, unemployment worker's com
- Benefits (e.g., medical insurance, retirement)
- Employee reimbursements (e.g., phone, internet, mileage)
- Your total overhead per recruiter. This includes rent, administrative help, sourcers, insurances, professional fees, recruiter training & development, etc.
- Tools and technologies you provide. This includes LinkedIn, job boards, sourcing tools, ATS, etc
Once you input accurate numbers for the above items, you can calculate your breakeven point before commissions.
Step 2: Decide where you believe your desired breakeven point. Is it at $100k of billing and collections, 150k, or some other number? The higher your breakeven point, the greater your risk.
Step 3: Decide on the first tier of your commission plan. Your breakeven point before commissions plus the commissions you expect to pay (projected first-year collections X your commission percentage) = your desired breakeven point.
It helps to run your calculations using different commission percentages to develop a commission plan that allows you to reach your desired breakeven point. Here are a few things to consider when deciding on your commission plan:
- The higher your base, the lower your commission rate should be. If you provide the same commission rate to all your recruiters regardless of the base, you add to your financial risk and create problems with employee expectations.
- Will your commission rate be on the total fee or just the part of the fee the recruiter is responsible for? Typically, the client-side people are credited with 50% of the fee, and the candidate side the other 50%. If you pay commissions on the total fee, then your rate needs to be 50% of what it would be if you split the revenue by client and candidate owners.
- It's common to set up tiers in commission plans so that the commission rates go up after people bill a specified amount of revenue. This is great but should avoid having a lot of tiers; 2-3 should do. I've seen firms set up five or more tiers, creating a commission calculation headache.
- It's common to have different comp plans for different recruiters. Just like your clients, everyone is not paid the same. It's wise to be flexible on your comp plan to help you hire the right people. Your goal is to achieve a reasonable level of profitability per recruiter regardless of the compensation.
Changing the comp plan when market conditions change
The reality of recruiting and life is that things will always change. Sometimes the changes are unexpected and severe. Ultimately, you are responsible for making decisions that lead to your firm's survival and profitability. Some employees believe it's set in stone once you agree on a comp plan. Not true! Below are scenarios that can occur, along with recommended actions to take.
- Your business hits a downcycle that does not appear temporary. It's best to hold team meetings and talk openly and honestly when this occurs. You may need to reduce people's base comp and increase their commissions. A significant base cut can encourage your lower performers to leave on their own without firing them. Most firms shrink during market downturns. You just hope to keep your best people.
- The balance between the client side and the candidate side shifts. Sometimes it's much more challenging to bring in job orders than to fill them. Other times the balance reverses. Many firms adjust their commission plans accordingly. For example, when candidates are in short supply and job orders plentiful, many firms raise commissions for the candidate side and lower them for the client side.
A word about draws
Some owners and leaders want to offer draws against commissions. This was fairly popular decades ago. I advise against this arrangement now for the following reasons.
- Employees know that the draw is just a loan. If they hit a rough patch and fall behind, they know they won't see any income for a while and have an incentive to leave and start over elsewhere.
- Draws against commission create a complicated bookkeeping system. Recruiters can fluctuate between being ahead and behind the draw. This creates extra conflict that is better avoided. When you pay commissions against draws, your recruiters may ask you to explain the new calculation regularly due to confutions. Sometimes, your analysis may be incorrect.
- Ultimately, your risk with a draw against commission is similar to base plus commission. If the person falls behind on the draw and leaves, they don't return the draw. Just like base, it's money you spent that's gone.
In summary, recruiter compensation plans are one of the most fundamental and critical parts of recruiting industry success. It's well worth the effort to take the time to get it right.